When Is Debt Good? (2024)

FAQs

When can debt be a good thing? ›

The bottom line

Good debt is low-interest debt that appreciates in value and/or helps me increase my net worth (think: student loans or a mortgage). Having some good debt can improve my credit score, but I do need to be careful not to go overboard lest it turn into bad debt.

Good debt should ideally be in low amounts, low cost, help you achieve your financial goals, and have potential tax advantages.

Simply put, “bad debt” is debt that you are unable to repay. In addition, it could be a debt used to finance something that doesn't provide a return for the investment.

35% or less: Looking Good - Relative to your income, your debt is at a manageable level. You most likely have money left over for saving or spending after you've paid your bills. Lenders generally view a lower DTI as favorable.

Debt is only beneficial if it's used properly. Good debt can generate significant value, may offer tax advantages, and could even elevate your credit score. Such as home loans or investments in long-term wealth growth opportunities like student loan programs.

Debt is an important, if not essential, tool in today's economy. Businesses take on debt in order to fund needed projects, while consumers may use it to buy a home or finance a college education.

Examples of good debt are taking out a mortgage, buying things that save you time and money, buying essential items, investing in yourself by borrowing for more education or to consolidate debt. Each may put you in a hole initially, but you'll be better off in the long run for having borrowed the money.

Now that we've defined debt-to-income ratio, let's figure out what yours means. Generally speaking, a good debt-to-income ratio is anything less than or equal to 36%. Meanwhile, any ratio above 43% is considered too high. The biggest piece of your DTI ratio pie is bound to be your monthly mortgage payment.

Paying off old debts before they reach the statute of limitations or credit reporting deadline can positively influence your payment history, a significant factor in your FICO score. This move can boost your credit score and contribute to a healthier credit profile.

The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.

What is unmanageable debt? ›

Personal debt can be considered to be unmanageable when the level of required repayments cannot be met through normal income streams. This would usually occur over a sustained period of time, causing overall debt levels to increase to a level beyond which somebody is able to pay.

“That's because the best balance transfer and personal loan terms are reserved for people with strong credit scores. $20,000 is a lot of credit card debt and it sounds like you're having trouble making progress,” says Rossman.

Debt is a necessary part of most business journeys. Businesses use debt to improve cash flow, pay suppliers, run payroll and more.

The benefit of debt financing is that it allows a business to leverage a small amount of money into a much larger sum, enabling more rapid growth than might otherwise be possible. In addition, payments on debt are generally tax-deductible.

Less debt usually leads to a better credit score, especially if you have a history of timely payments. Credit bureaus take note of how much of your available credit you're using, and lower utilization generally leads to a higher score. The journey to become debt-free isn't easy, but it can be incredibly rewarding.

All else being equal, companies want the cheapest possible financing. Since Debt is almost always cheaper than Equity, Debt is almost always the answer. Debt is cheaper than Equity because interest paid on Debt is tax-deductible, and lenders' expected returns are lower than those of equity investors (shareholders).